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Voluntary Debt Reduction: Incentives and Welfare

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  • Elhanan Helpman

    (International Monetary Fund)

Abstract

In an economy with a debt overhang, investment depends on expected tax rates, but expected tax rates depend on the debt's face value. Therefore investment depends on the face value of debt. This relationship may lead to a positive or negative association between debt and investment. The paper explores the desirability of debt reduction. First, it characterizes circumstances in which debt reduction is desirable from the collective point of view of the creditors. Second, it formulates the forgiveness decision as a noncooperative game among creditors and explores the scope for debt reduction as an outcome of this game.

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Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 36 (1989)
Issue (Month): 3 (September)
Pages: 580-611

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Handle: RePEc:pal:imfstp:v:36:y:1989:i:3:p:580-611

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References

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  1. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," World Bank Economic Review, World Bank Group, World Bank Group, vol. 1(3), pages 377-95, May.
  2. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  3. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, American Economic Association, vol. 78(4), pages 647-61, September.
  4. Michael P. Dooley, 1988. "Buy-Backs and Market Valuation of External Debt," IMF Staff Papers, Palgrave Macmillan, vol. 35(2), pages 215-229, June.
  5. W. Max Corden, 1988. "An International Debt Facility?," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 401-421, September.
  6. Claessens, Stijn, 1990. "The debt laffer curve: Some estimates," World Development, Elsevier, Elsevier, vol. 18(12), pages 1671-1677, December.
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Cited by:
  1. Marcel Fafchamps, . "Sovereign Debt, Structural Adjustment and Conditionality," Working Papers, Stanford University, Department of Economics 96015, Stanford University, Department of Economics.
  2. Stephan Koren, 1992. "Debt relief for Eastern Europe — Its costs and the distribution of proceeds: Some preliminary results," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 128(4), pages 639-661, December.
  3. Fernandez-Ruiz, Jorge, 1996. "Debt and incentives in a dynamic context," Journal of International Economics, Elsevier, Elsevier, vol. 41(1-2), pages 139-151, August.
  4. Tengstam, Sven, 2005. "Debt Relief and Adjustment Effort in a Multi Period Model," Working Papers in Economics, University of Gothenburg, Department of Economics 176, University of Gothenburg, Department of Economics.
  5. Berthelemy, Jean-Claude, 2001. "HIPC Debt Relief and Policy Reform Incentives," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Andrew M. Warner, 1991. "Did the debt crisis cause the investment crisis?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 418, Board of Governors of the Federal Reserve System (U.S.).
  7. Oladi, Reza, 2003. "International involuntary lending and contingent default threat," International Review of Economics & Finance, Elsevier, Elsevier, vol. 12(2), pages 237-245.
  8. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics, International Economics Section, Departement of Economics Princeton University, 83, International Economics Section, Departement of Economics Princeton University,.
  9. Hayri, Aydin, 1997. "Debt Relief," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1701, C.E.P.R. Discussion Papers.
  10. Agenor, Pierre-Richard & Aizenman, Joshua, 1999. "Financial sector inefficiencies and coordination failures : implications for crisis management," Policy Research Working Paper Series, The World Bank 2185, The World Bank.
  11. Long, Ngo Van, 1989. "The political economy of the international debt crisis," Kiel Working Papers 384, Kiel Institute for the World Economy.
  12. Michael Bowe & James W. Dean, 1997. "Debt-equity swaps and the enforcement of sovereign loan contracts," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(1), pages 59-83.
  13. Johansson, Pernilla, 2010. "Debt Relief, Investment and Growth," World Development, Elsevier, Elsevier, vol. 38(9), pages 1204-1216, September.
  14. Rolf Maier, 2005. "External Debt and Pro-Poor Growth," Macroeconomics, EconWPA 0504031, EconWPA.
  15. Maier, Rolf, 2005. "External Debt and Pro-Poor Growth," Proceedings of the German Development Economics Conference, Kiel 2005 23, Verein für Socialpolitik, Research Committee Development Economics.
  16. Idlemouden, Khadija & Raffinot, Marc, 2005. "Le fardeau virtuel de la dette extérieure. Une revue de la littérature à l'aune de l'initiative « pays pauvres très endettés » (PPTE)," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4089, Paris Dauphine University.

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